Popular's Sale Elicits a Textbook Reaction from Debt Markets

  • No sign of contagion as AT1s in wider market stays cool
  • Securities down the capital structure tumble on sale terms

The decision by European regulators to impose principal losses on holders of additional Tier-1 debt for the first time has run as per script. The value of Banco Popular Espanol SA’s riskiest notes plunged even as the wider market stayed cool, putting to rest concerns about a contagion.

Banco Santander SA, Spain’s largest bank, is buying Madrid-based Popular for 1 euro. A move to convert Popular’s tier-2 notes into new shares under the plan has also wiped out the value of such bonds. The securities at the top of Popular’s capital structure surged.

“The process has worked as expected,” Eoin Walsh, a portfolio manager at TwentyFour Asset Management, wrote in a note. While equity holders and subordinated debt holders have taken losses, deposit holders have been protected. The Spanish authorities have averted a run on the bank or banking system and use of taxpayers’ money, he said.

Conversely, the lender’s senior bonds maturing in February 2020 jumped the most on record Wednesday, by 11.3 cents on the euro to 101.974, according to data compiled by Bloomberg. "Senior bonds are protected," John Raymond, an analyst at CreditSights, wrote in a client note. Hence they have traded up from levels close to 90 in the past few days, he added.

The write-down of Banco Popular hybrids is “unlikely to lead to contagion in the wider AT1 market as there is no read-across to other banks,” Roger Francis, an analyst at Mizuho International Plc., said in an interview. AT1s recently issued by  Banco de Sabadell SA and Caixabank SA have bounced back after dropping in the immediate aftermath.

“AT1 and T2 bond holders will question the timing,” TwentyFour’s Walsh said. “We’d have expected to have had a missed coupon before we’d have seen a write-down of an AT1”.

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